Why Asia won't help U.S. curb its trade deficit
Why Asia won't help U.S. curb its trade deficit
Andy Mukherjee, Bloomberg, China
A first-ever full health check of Asian banks by Standard &
Poor's has offered revealing insight into why the U.S. current
account deficit may not unravel soon.
Out of the 27 Chinese, Indian, Thai, Indonesian, Philippine
and South Koran lenders rated by S&P on its nine-point Bank
Fundamental Strength Ratings scale, none could manage to score
more than a humble C+.
A majority of the region's banks ended up with D or D+. The
worse the score, the higher the probability that lenders would
need to seek external assistance in the event of financial
distress, the rating company said in a press release yesterday.
Weak Asian banks, says Deutsche Bank AG economist Sanjeev
Sanyal, are a key reason why the region will continue to run
large current account surpluses -- and the U.S. a deficit --
puzzling analysts who find it historically and theoretically
counterintuitive that fast-growing developing economies such as
China and India should lend capital to rich nations.
Asia doesn't yet have a banking system that can mobilize
domestic savings efficiently and invest them prudently. In China,
banks have contributed to widespread overcapacity; in India, they
have cheaply financed the government's budget deficit.
That financial weakness makes it necessary for the region's
central banks to buy insurance against external shocks by
exporting capital into their foreign reserves, a US$2.5 trillion
treasure chest of U.S. Treasuries and other "safe" securities.
The alternative to reserve buildup is for Asia to clean up its
banks, which could take years to do. Meanwhile, the region may
have to forgo a golden opportunity presented by a preponderance
of working-age people in the population.
"Foreign reserves provide protection from external crises,"
Sanyal said in an interview in Singapore.
"They may not resolve the problem of poor capital allocation,"
Sanyal said, "but they do keep the virtuous cycle of demographic
dividend feeding into a high savings rate and strong economic
growth from coming to a premature end."
China, it's now widely acknowledged, has an enormous over-
investment problem, which stems from the influence Communist
party officials wield on lending decisions.
"Political power still plays a decisive role in China's
capital allocation," says Andy Xie, Morgan Stanley's chief
economist for Asia. "Local governments couldn't create excess
capacity without the help of a state-owned financial system."
The paradox is that if Chinese banks become more prudent and
start investing less, the gap between domestic savings (47
percent of gross domestic product) and investments (44 percent of
GDP) will widen, pushing up China's current account surplus (3
percent of GDP) even higher.
Alternatively, China can reduce its current account surplus by
encouraging citizens to spend more and save less. That might be
very difficult to do immediately, since China's high savings rate
is primarily a product of its bloated working-age population.
According to statistics compiled by the United Nations, 71
percent of China's 1.3 billion people currently belong to the age
group of 15 to 64. For India, the ratio is 62 percent.
Japan is aging. China has until 2015 before the share of
working-age population starts falling steeply as a result of the
country's one-child policy. India's youth bulge can potentially
drive accelerated economic growth until 2035; the Philippines
will be at its demographic peak in 2040.
Other Asian nations fall between Japan and the Philippines.
"If each country is able to take advantage of the demographic
opportunity," said Deutsche Bank's Sanyal, "Asia can remain the
world's growth engine for the first half of the 21st century."
Latin America also can join the party. Brazil's population age
profile is similar to India's, while Argentina, which has begun
reversing a four-decade-long retreat from its demographic prime,
will once again have a surfeit of working-age people in 2030,
Deutsche Bank's research based on UN forecasts show.
If the Deutsche economist is right, Asian economies are
running current account surpluses partly because their financial
systems are weak and their demographic clocks are ticking away
and because the 1997 financial crisis has made them deeply
suspicious about the stability of capital flows.
Meanwhile, the U.S., thanks to the credibility of its
financial markets, ran an unprecedented $666 billion current
account deficit last year, a record that may be breached in 2005.
The world's finance ministers must stop blaming one another
for not doing enough to rebalance the global economy.
Instead, they must collectively ask themselves if there's a
way to get capital flowing from rich nations to poor ones again.
The solution must involve a bigger role for the International
Monetary Fund (IMF). Of what use is the IMF when Asian nations
would rather seek safety in their bloated reserves, which Bank of
England Governor Mervyn King has aptly termed as the Asian
region's own "do-it-yourself lender of last resort?"
If nothing changes, Asian nations will only begin accepting
current account deficits only when they're sure their banks won't
be misallocating imported capital. Global rebalancing may then be
in for a long wait.